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February 13, 2019

IMF published its staff report and selected issues report under the 2018 Article IV consultation with the Republic of Croatia. Directors commended the Croatian National Bank (CNB) for its conservative prudential policies and encouraged the authorities to consider additional measures to prevent excessive household borrowing, if needed. They welcomed continued efforts toward reducing the stock of non-performing loans (NPLs), encouraged continued improvements in bankruptcy legislation, and advised a comprehensive review to ensure that the insolvency framework aligns fully with the international best practices.

The staff report highlighted that, overall, the banking system is very liquid, is well-capitalized, and has continued to gradually consolidate. The comfortable average capital adequacy ratio has eased the introduction of IFRS 9 and the gradual increase of risk-weights on foreign-exchange sovereign debt, beginning in 2018. The NPL ratio (90 days overdue) has continued to decline to 10.3% in September 2018, largely due to the NPL sales. Given the still high corporate indebtedness and the level of NPLs, provisioning remains high, although the coverage ratio declined somewhat to 59% due to the NPL sales. Beginning in 2018, the monitoring of loans overdue between 30 and 90 days has intensified and banks are required to develop strategies to lower their NPL ratio. Bank lending to households has been growing, although credit to the non-financial corporate sector has remained subdued. 

The report further notes that financial intermediation costs of Croatian banks are still relatively high, possibly due to the relatively low level of digitalization, retroactive contract enforcement, or regulatory cushions. Recent research shows that better governance practices are conducive to more predictable contract enforcement and would help reduce costs, risks, and uncertainty of doing business, thus ultimately lowering the financial intermediation costs. The also report highlights that strong supervisory and macro-prudential policies of CNB have contained the potential pressure points. Effective from 2018, the appraisals of household housing loans were tightened, giving more emphasis to income indicators. The real estate market is also picking up, albeit from a low base and the recovery is rather segmented. Should both household borrowings and real estate prices further accelerate, additional macro-prudential measures may need to be considered, including a comprehensive debt-service-to-income ratio capturing all debts, not just debts related to housing loans. 

The selected issues report explores how inter-sectoral vulnerabilities and risks have shifted over 2001–17 and especially after the global financial crisis. The report analyzes financial positions at the sectoral-level deposit-taking institutions and non-financial corporations, households, the public sector, and CNB by disaggregating them into instruments, currencies, and maturities. A section of the report employs balance-sheet analysis to gauge cross-sectional exposures and risks. Finally, the report discusses policies to reduce the remaining inter-sectoral vulnerabilities.


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Keywords: Europe, Croatia, Banking, Article IV, NPLs, Macro-Prudential Policy, CNB, IMF

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